Working Papers and Chapters

Economists have often argued that "pay for performance" is the optimal compensation scheme. However, use of the simplest form of pay for performance, the piece rate, has been in decline in manufacturing in recent decades. We show both theoretically and empirically that these changes are due to adoption of "modern manufacturing" in which firms produce a greater variety of products to a more demanding quality and delivery standard.
We further develop a theory of the type of compensation system appropriate for this kind of production, in which there is a high return to "multi-tasking", where the same workers perform both easy-to-observe and hard-to-observe tasks and to "just-in-time" production, which entails a high cost of holding inventory.
We test these predictions using detailed monthly...

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